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MLB Arbitration in the Orioles-Nationals Cablecasting Lawsuit

An owners’ fight over an “inside baseball” arbitration splitting cable television profits spills into a New York City trial court. Lawyerball traces this dispute from the baseball antitrust exemption to the implications of the judge’s rulings for the baseball business, the game, its fans, and ordinary Americans.

All business and legal documents described in this presentation are available on the Resources Page at www.lawyerball.com. Photo of Sports Museum at Orioles Park at Camden Yards, Baltimore, Maryland.

Photo of Skydome Stadium, Toronto, Ontario, Canada.

See “Major League Baseball Franchise Valuations”, estimating the value of MASN at $492 million, October 23, 2013, Bloomberg Visual Data at http://www.bloomberg.com/infographics/2013-10-23/mlb-team-values.html. Photo of broadcasting tower in Stuttgart By Creator-bz at English Wikipedia, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=47694513.

Photo of New York County State Supreme Court, Foley Square, New York City.

Photo of New York County State Supreme Court, Foley Square, New York City.

Photo of President John F. Kennedy throwing out “first pitch” of 1961 baseball season at Griffith Stadium, Washington, D.C.

MLB Arbitration in the Orioles-Nationals Cablecasting Lawsuit

1.
MLB ARBITRATION IN THE
ORIOLES-NATIONALS
CABLECASTING LAWSUIT
IS THIS WHAT YOU SHOULD EXPECT FROM
MANDATORY ARBITRATION?
Charles H. Martin, JD, MBA
@Every1sGuide, #LawyerballLaw, Lawyerball.com
www.facebook.com/Every1sGuidetoElectronicContracts

2.
The Montreal Expos Move to Washington, D.C.
• In 2005, the Montreal Expos National League baseball club moved to
Washington, D.C. to become the Washington Nationals. Pursuant to
the Major League Rules, the relocation was approved by a 29-1 vote of
the Major League Baseball (MLB) clubs. At that time, the Expos were
owned by all thirty MLB clubs, who had bought the club to avoid its
bankruptcy and its elimination as a franchise.
• The single vote against relocation was cast by the owners of the
American League Baltimore Orioles. This club played their games only
forty miles from D.C. About 20% of their fans came from the
Washington area. Peter Angelos, the principal owner of the Orioles,
complained that the Nationals’ proximity to his club would cause it
great financial harm. He threatened to sue Major League Baseball to
stop the move, even though (unlike some other clubs) he had no
territorial right to exclude the Expos/Nationals from operating in
Washington, D.C.

3.
MLB and the Orioles Settle The Threatened Lawsuit
With the “Television Agreement”
• On March 28, 2005, Major League Baseball, the Montreal Expos, The
Baltimore Orioles and their cable sports channel (Mid-Atlantic Sports
Network or “MASN”) signed an agreement to eliminate Peter
Angelos’s threats to sue MLB over the Expos’ relocation to
Washington, D.C. The agreement (“Television Agreement”) gave the
Orioles owners the unique right to cablecast the games of the new
Washington Nationals, in addition to their own baseball games.
• The Television Agreement provided that the Nationals would own 10%,
and the Orioles 90%, of MASN initially. The Nationals’ ownership
would increase to 33% over 28 years, but the Orioles would always own
at least 67% of MASN.
• The Television Agreement provided for low cablecasting rights fees, to
be paid by MASN equally to each club for the first five years of the
contract, starting at $25 million each and increasing to $29 million
each.

4.
The Television Agreement Resets the Cablecasting
Rights Fees Every Five Years
• After every five year period, the Television Agreement provides for a
reset of the cablecasting rights fees paid to each club to reflect current
television market values. If the clubs cannot agree on the new rights
fees amounts, they are to be set by a three-person arbitration panel
composed of representatives of three other MLB clubs that are
members of the MLB Revenue Sharing Definitions Committee
(“RSDC”).
• The RSDC normally determines the value of MLB club regional
television contracts for the purpose of revenue-sharing arrangements
that make smaller market clubs more competitive with larger market
clubs.
• In 2012, the RSDC (composed of Mets, Rays, and Pirates
representatives) determined the new 2012-2016 rights fees amounts.
Release of this determination was withheld until 2014, however, while
MLB tried to broker the sale of MASN to the COMCAST cable group.

5.
RSDC Sets 2012-2016 “Fair Market Value” of the Rights Fees
Based on Projected Revenues and Comparable Profit Margins
• In the 2012 RSDC Arbitration, the Orioles argued that the rights fees for
each club should be $34 million for 2012. The Nationals argued that the
rights fees for each club should be $109 million for 2012.
• The RSDC determined the rights fees market value based on 1)
projected MASN revenues and costs over the 2012-2016 period, and 2)
the range of typical MLB regional sports channel profit margins. The
RSDC predicted that MASN’s 33% operating profit would decline over
the period as new, higher rights fees matched those in the comparable
television markets of the Atlanta Braves, Cleveland Indians, and Texas
Rangers.
• The RSDC noted that the Orioles had already received “significant
returns” from higher than normal margins that had increased the value
of the Orioles’ equity ownership of MASN. It rejected the Orioles’
argument that MASN should be assured a perpetual 20% operating
profit margin.

6.
The RSDC “Splits the Difference” between the Orioles and
Nationals Proposed Rights Fees Amounts
• The RSDC concluded that MASN’s 2012-2016 operating profit margin
would be only 5%, because 1) its 2007 margin was only 6.2% when
sports television content was less valuable, and 2) the Orioles’ right to
receive from MASN fees equal to any fees received by the Nationals
would further reduce MASN’s profit margin.
• Applying this methodology, the RSDC awarded these rights fees to
each club: 2012 - $53,170,018, 2013 - $56,253,879, 2014 - $59,347,843, 2015
- $62,611,974, and 2016 - $66,744,384.
• In total the RSDC awarded each club $298,128,098 for 2012-2016 versus
the total of $170,000,000 for each club that the Orioles had offered, a
difference of $128,128,098 for each club.
• Although the Orioles would receive a higher amount of rights fees
under the RSDC award, it would be equal to the Nationals’ fees; while
the Orioles would own 80-85% of the equity value of MASN, which
would be higher if MASN paid lower rights fees to each club.

7.
MLB Tries and Fails to Sell MASN to Comcast from 2012 to
2014. MLB Issues the Rights Fees Arbitration Award.
• The MLB/RSDC Arbitration Panel reached its conclusion in the MASN
rights fees dispute shortly after holding a hearing in April 2012, in which
the clubs and their witnesses participated. Rather than issue the award,
MLB Commissioner Allan H. (Bud) Selig tried to broker the sale of the
MASN sports channel to the cable giant, Comcast.
• MASN had an estimated market value at that time of more than $500
million. If Selig had been able to get Comcast to buy MASN, the Orioles
owner, Peter Angelos, would have been able to receive 83-85% of the
market value of MASN immediately. MLB and the Nationals would have
been able to avoid the costly and risky litigation that developed after the
sale fell through.
• The regional cablecast rights fees received by MLB teams increased
substantially, however, during the period from 2005 to 2014, reducing the
appeal to Comcast of ownership of a cable sports channel televising MLB
games.
• MLB issued the 2012 arbitration award on June 30, 2014.

8.
The Orioles Petition a New York State Trial Court To
Vacate the MLB/RSDC Arbitration Award
• On July 2, 2014, the Orioles initiated an action in the New York State
Supreme Court, County of New York, seeking to vacate the RSDC
arbitration award. The Nationals filed a Petition to Confirm the award
on July 24, having failed to get the MLB Commissioner to confirm it.
• The Orioles asked that, if the award were vacated, the parties should be
ordered to redo the arbitration before an entity other than MLB. They
made four specific arguments in their filings with, and hearings before,
Justice Lawrence Marks:
• 1) the award was obtained through corruption, fraud or undue means,
• 2) the award exceeded the arbitrator’s scope of authority, or was made
with manifest disregard of the law,
• 3) there was prejudicial misconduct by the arbitrators, and
• 4) there was “evident partiality” against MASN and the Orioles in the
arbitration, because

9.
The New York Judge Vacates the MLB Arbitration Award
for “Evident Partiality” from a Law Firm’s Multiple Roles
• a) MLB lent the Nationals $25 million in 2013 as a partial advance payment
of their future rights fees award in order to help their cash flow, and
• b) the participation of the Proskauer Rose law firm (MLB Commissioner
Rob Manfred’s former employer) as counsel to MLB and the Nationals in
the arbitration, and to the three clubs on the arbitration panel in three
unrelated matters.
• Justice Marks rejected the first three arguments and the first “evident
partiality” argument as grounds to vacate the award. He agreed, however,
with the last argument that the arbitration involved “evident partiality”
against the Orioles, because the Orioles had objected at the beginning of
this “inside baseball” arbitration to the participation of the Proskauer
Rose firm in the arbitration in the multiple roles of
• - the simultaneous advisor to MLB i) in the arbitration, and ii) in unrelated
legal matters like the reorganization of the MLB Commissioner’s office.

10.
Justice Marks Criticizes MLB for “Evident Partiality”
in Ignoring Orioles’ Objections to Law Firm
Multiple Roles
• - advisor in unrelated matters to each of the MLB clubs represented on
the arbitration panel; and
• - the legal advisor to both the Washington Nationals and the Baltimore
Orioles in the rights fees arbitration.
• The Proskauer Rose law firm responded to the Orioles’ objection by
withdrawing as the Orioles’ counsel in the arbitration. MLB refused,
however, to disqualify the firm from advising any other participants in
the arbitration, including the Nationals.
• Justice Marks decided that “What [MASN and the Orioles] did not
agree to…was a situation in which MASN’s arbitration opponent, the
Nationals, was represented in the arbitration by the same law firm that
was concurrently representing MLB and one or more of the arbitrators
and/or the arbitrators’ clubs in other matters....”

11.
Justice Marks Criticizes MLB for “Evident Partiality”
in Ignoring Orioles’ Objections to Law Firm
Multiple Roles
• Justice Marks wrote that “…it might have been a simple decision...to
confirm the award if MLB, as administrator of the arbitration, had
taken MASN’s objections seriously, and actually done something about
it.”
• He offered examples of possibly satisfactory MLB actions, included
encouraging the Nationals to use other lawyers, screening Proskauer’s
arbitration lawyers from other firm lawyers who advised MLB or any
clubs during the arbitration, directing the arbitrator panel clubs to fully
disclose any potentially conflicting representations by Proskauer of
them, or updating the parties on MLB’s own continuing and increasing
use of Proskauer as an advisor.
• As the judge wrote “Yet MLB did nothing, except assure [MASN and
the Orioles] repeatedly that their concerns would be preserved and not
waived by their participation before the RSDC.”

12.
Justice Marks Orders the MLB Arbitration Award Vacated.
The Orioles Appeal His Refusal to Disqualify MLB as an
Arbitration Forum
• Justice Marks concluded that “this complete inaction objectively
demonstrates an utter lack of concern for fairness of the proceeding
that is ‘so inconsistent with basic principles of justice’ that the award
must be vacated.”
• Despite winning their argument to vacate the 2014 arbitration award,
the Orioles in December, 2015 filed an appeal of the judge’s decision to
not disqualify MLB as an arbitration forum, because “no potential
RSDC member can be neutral and impartial: the RSDC as a forum is
conflicted and thoroughly compromised.”
• MLB responded that it had hired new lawyers from the firm Sullivan &
Cromwell to advise it for the next RSDC arbitration before a panel
composed of representatives of the Milwaukee Brewers, Seattle
Mariners, and Tampa Bay Rays. It set a date in August, 2016 for the
new MLB arbitration hearing.

13.
Justice Marks Orders the New MLB Arbitration
Stayed Pending the Appeal of His Decision
• In addition, the Nationals confirmed that their new lawyers for the new
arbitration, the Quinn, Emanuel firm, neither represents MLB, nor any
members of the new MLB arbitration panel or their clubs.
• On July 11, 2016, Justice Marks denied the Nationals’ motion to compel
the Orioles to proceed with MLB arbitration, and granted the Orioles’
motion to stay arbitration pending their appeal, because “the parties
should not be arbitrating, again, without a final determination on the
arbitral process or forum.”
• It might be 2017 before a New York State appeals court determines
whether the trial judge’s vacating of the 2014 MLB arbitration award,
and refusal to disqualify MLB as a future arbitration forum, was
correct. Depending on that decision, it might be longer before another
arbitration panel decides the rights fees amounts for the 2012-2016
period.

14.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• Given that under the Federal Arbitration Act “judicial review of arbitration
awards is extremely limited”, how should the future of mandatory
arbitration be viewed by the parties in this case, and by employees,
consumers and businesses?
• Q: Should the Nationals try to settle this case to avoid receiving less money
in a new arbitration?
• A: No. Justice Marks denied all the Orioles’ arguments that the substance
of the MLB arbitration award was wrong. If the Nationals and MLB have
eliminated the lawyer conflicts that the judge said were unfair to the
Orioles, the same award methodology is likely to be applied to find the
“fair market value” of the rights fees, with the same result. It will also be a
precedent for the 2017-2021 rights fees determinations that are about to
begin. Their only reason to settle might be a proposal from the Orioles that
approaches the amount of the previous MLB arbitration award, discounted
by the likely costs of future litigation delays in having a court order the
award to be paid in that amount.

15.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• Q: Should the Orioles try to settle this case to avoid receiving less money in
a new arbitration?
• A: No. The Orioles are likely to be directed to pay the same amount in
rights fees in the next arbitration that they were ordered to pay in 2014.
Every day that they delay that order, and its enforcement, by litigating and
appealing in courts, is a day that the rights fees money stays in their
pockets, and finances their team. The Orioles should not count on goodwill
from the Nationals for a possible agreement to set future rights fees by a
formula that preserves the current disproportionate value of MASN equity
compared to other baseball cable sports channels.
• The Orioles are unlikely to be required to pay interest on the rights fees to
account for the time period since the fees were scheduled to be paid
according to the Television Contract. “Pre-judgment interest” is usually
awarded only on money owed in an undisputed amount. The “fair market
value” of the cablecasting rights fees is clearly a disputed amount.

16.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• Q: How should MLB negotiate franchise relocations, and conduct
arbitrations of owner disputes to avoid these types of court delays and
reversals?
• A: MLB conducts its business affairs with an eye to avoiding criticism in
Congress of its unique antitrust exemption. The Supreme Court in 1922
granted the exemption on grounds that later Justices have found to be
erroneous, but have refused to correct, leaving it to Congress to redress.
• The Orioles-Nationals case has exposed the peril of the MLB
Commissioner’s office acting in multiple roles in “inside baseball” club
disputes. The NFL Commissioner has been criticized for acting as
investigator, prosecutor and judge in player disciplinary proceedings. The
MLB Commissioner (or its main law firm) acted as arbitration
administrator, MLB legal advisor, and as advisor both to the RSDC
arbitrator clubs, and to the Nationals as an arbitration party. These are too
many hats for one Commissioner (or his lawyers) to wear, and leads to
inevitable appearances of conflicting interests.

17.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• The MLB Commissioner should consider appointing non-MLB
arbitrators for future inter-club business disputes. It should avoid
having any of the dispute parties, or the administrators, represented by
a law firm that also advises MLB.
• Questions for Employees, Consumers and Small Businesses Required
to Use Mandatory Arbitration for Their Contract Disputes –
• Q: If an employee, consumer or small business is required to use
mandatory arbitration for contract disputes, can they get an arbitration
award vacated like the Orioles did, because the arbitration was unfair in
substance or in its procedures?

18.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• A: Arbitration may have these advantages for both parties over
litigation: 1) it is faster and simpler, 2) it is usually less expensive, 3)
arbitrators usually know more about the specific arbitration subject
than judges, and 4) the party requiring arbitration might pay for the
legal costs of the other party up to a certain amount.
• Employees, consumers and small businesses often object to mandatory
arbitration, however, because –
• 1) the results of an arbitration are usually confidential, and cannot be a
precedent for a future arbitration or litigation, 2) the arbitration is
usually conducted where the party requiring it is located, 3) there is no
right to a jury trial, 4) there is no class action right, and 5) cheap, quick
and convenient small claims court litigation is prohibited by most
arbitration clauses.

19.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• The most successful “fairness” argument available against mandatory
contract terms, including arbitration, has been “unconscionability”. In
AT&T Mobility LLC v. Concepcion, however, the U.S. Supreme Court
in 2011 ruled that a mandatory arbitration clause that prohibited a class
action for cell phone consumers claiming false advertising and fraud
could not be invalidated as unconscionable.
• Other contract defenses remain available against mandatory arbitration
clauses, such as lack of notice of the clause (especially in digital
contracts), or an unreasonably distant or expensive arbitration forum.
The burden of proof is on the party requiring arbitration to show there
was adequate notice of the requirement.

20.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• Contracts require mutual obligations, so when a retailer required its
customers to arbitrate their disputes, but allowed itself an “escape hatch”
from arbitration, this clause was invalidated.
• When a mandatory arbitration clause denies a statutory right, such as
under labor or consumer protection laws, a judge will often invalidate the
clause.
• Consumer and employee advocates often argue that arbitrators (or their
lawyers) are biased against the parties who have mandatory arbitration
requirements imposed against them. They argue that this bias is often
unconscious, but real, because the party requiring arbitration employs the
same arbitrators or lawyers, who naturally view them favorably as a source
of repeat employment. This was the argument that won for the Orioles in
their appeal of the cable rights fees litigation. It has sometimes also
succeeded for consumers, although the effort to prove bias by the arbitrator
or a related law firm is rarely worth the effort for parties without deep
pockets.

21.
What Are the Questions Raised and Lessons Learned From
the Orioles-Nationals Cablecasting Arbitration?
• In 2010, Congress passed the Dodd-Frank Act, which requires the new
Consumer Financial Protection Bureau (CFPB) to issue rules to restrict
mandatory arbitration clauses in consumer financial contracts, if it
finds it to be in the public interest for the protection of consumers. In
2015, the CFPB issued preliminary rules to prohibit mandatory
arbitration clauses in consumer financial contracts that prohibit
consumers from pursuing class action remedies.
• Even if the CFPB rules against class action prohibitions are
implemented, however, they will only apply to consumer financial
contract clauses. They will not apply to mandatory arbitration clauses
in contracts for non-financial consumer transactions, or in employee or
business contracts.

22.
For More and Continuing Information
See www.charleshmartin.com
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e/B00E8NSUCU
See www.lawyerball.com